Arbitrage Funds in India 2025: Meaning, Taxation, Risks, Benefits & More
In the dynamic financial landscape in India, investors are increasingly turning towards arbitrage funds for risk-averse profits. Arbitrage funds in India offer investors a unique opportunity to profit from market inefficiencies without taking on significant risk. These funds can be an attractive investment option during periods of market volatility. In this blog, we will explore the meaning of arbitrage funds and the best arbitrage mutual funds in India, offering insights into their features, advantages, risks, and other tips and strategies.
Top Arbitrage Mutual Funds in India Based on 5Y CAGR
| Fund Name | Fund Size (Rs. in cr) | Expense Ratio (%) | 3Y CAGR (%) | 5Y CAGR (%) |
|---|---|---|---|---|
| Tata Arbitrage Fund | 12,674.72 | 0.30 | 7.12 | 6.30 |
| Invesco India Arbitrage Fund | 18,909.98 | 0.39 | 7.48 | 6.29 |
| Edelweiss Arbitrage Fund | 12,135.81 | 0.38 | 7.22 | 6.26 |
| Kotak Equity Arbitrage Fund | 54,913.13 | 0.43 | 7.28 | 6.23 |
| Nippon India Arbitrage Fund | 14,738.76 | 0.38 | 7.07 | 6.13 |
| Axis Arbitrage Fund | 5,913.10 | 0.33 | 7.03 | 6.08 |
| Aditya Birla SL Arbitrage Fund | 14,115.19 | 0.29 | 7.05 | 6.05 |
| HSBC Arbitrage Fund | 2,423.19 | 0.26 | 6.89 | 6.03 |
| Baroda BNP Paribas Arbitrage Fund | 1,357.57 | 0.38 | 6.92 | 6.02 |
| UTI Arbitrage Fund | 6,694.66 | 0.28 | 6.96 | 6.02 |
Disclaimer: Please note that the above table is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing. The data is derived from Tickertape Stock Screener and is subject to real-time updates.
Note: The list of top arbitrage funds is from 20th January 2025, and the data is derived from Tickertape Mutual Fund Screener, using the following filters:
- Category: Arbitrage Fund
- Plan: Growth
- CAGR 5Y: Sorted from Highest to Lowest
🚀 Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.
Overview of the Best Arbitrage Funds in India (2025)
Here’s an overview of the top 5 mutual funds in India in the arbitrage mutual fund category.
Tata Arbitrage Fund
Tata Arbitrage Fund Direct Growth aims to exploit arbitrage opportunities across equity and derivatives markets, ensuring minimal risk and consistent returns. This fund focuses on capital preservation and seeks to offer better post-tax returns compared to traditional savings instruments, using a market-neutral strategy.
Invesco India Arbitrage Fund
Invesco India Arbitrage Fund is a Hybrid Mutual Fund Scheme launched by Invesco Mutual Fund. This fund focuses on generating income by capitalising on arbitrage opportunities arising from price differences between the cash and derivatives markets. Additionally, any surplus cash is deployed in fixed-income instruments to enhance returns while maintaining a low-risk profile.
Edelweiss Arbitrage Fund
The fund aims to generate capital appreciation and income by primarily investing in arbitrage opportunities available in both the cash and derivative segments of the equity markets. It also seeks arbitrage opportunities within the derivatives market and allocates the remaining portion of the portfolio to debt and money market instruments.
Kotak Equity Arbitrage Fund
Kotak Equity Arbitrage Fund is an Arbitrage mutual fund scheme from Kotak Mahindra Mutual Fund. This fund seeks to generate capital appreciation and income through arbitrage opportunities in the cash and derivatives markets. To ensure stability, the balance of the portfolio is allocated to debt and money market instruments. The fund is designed to provide relatively lower risk while benefiting from market inefficiencies.
Nippon India Arbitrage Fund
Nippon India Arbitrage Fund is an Arbitrage mutual fund scheme from Nippon India Mutual Fund. The objective of this fund is to generate income by leveraging arbitrage opportunities between the cash and derivatives markets, as well as within the derivatives segment. It also invests in debt securities and money market instruments to enhance liquidity and maintain a stable return profile.
How to Invest in Arbitrage Mutual Funds?
You can easily invest in arbitrage mutual funds by following these steps:
- To invest in the best mutual funds in India, you can visit an equity investment platform such as smallcase or Tickertape.
- The next step would be to research and identify the best arbitrage funds which aligns with your investment thesis. You can easily select and learn more about the best performing mutual funds India with the help of a financial tool like the Tickertape Mutual Fund Screener. With 50+ pre-loaded filters, it helps you to create a comprehensive list by giving insights about the fund’s performance. Try it now!
- Once you have selected the top performing mutual funds based on different metrics and parameters, go to smallcase.com or the smallcase app, and login via your phone number. Click on ‘Discover‘ and enter the name of the specific mutual fund name in the search bar and hit enter. You can click on ‘Invest now’ and select whether you want to invest a lump sum amount or start a SIP and start investing!
Note: It is important to conduct thorough research and consult a financial advisor before investing in anything. Let us now learn how arbitrage funds work.
However, if you’re confused about which stocks to pick, you can explore smallcases:
- smallcases are readymade portfolios of stocks/ETFs, that are based on a theme idea or strategy
- They’re created and managed by SEBI-registered experts
- smallcase.com offers over 500+ stock portfolios, created by 180+ managers
- Some of the popular smallcases among new investors are as follows:
Disclosures for aforementioned smallcases
What are Arbitrage Funds?
Arbitrage funds are mutual funds that aim to generate returns by exploiting price differences in different markets or forms of a security. They typically buy and sell arbitrage stocks and derivatives to benefit from the spread between cash and futures markets, offering low-risk returns in stable or volatile markets alike. Over a 6 to 12 month period, the returns from arbitrage funds are similar in nature to those of liquid funds.
How Do Arbitrage Funds Work?
Arbitrage funds work by simultaneously buying and selling the same asset in different markets to capture the price differential. Here’s a simplified breakdown:
- Identifying Arbitrage Opportunities: Fund managers look for price discrepancies between the cash (spot) and futures markets of the same asset.
- Simultaneous Transactions: They buy the asset at a lower price in one market (usually the cash market) and sell it at a higher price in another market (usually the futures market).
- Locking in Profits: The difference between the buying and selling prices, minus transaction costs, represents the profit from the arbitrage opportunity.
- Investing in Debt: When arbitrage opportunities are scarce, a portion of the fund’s assets may be allocated to debt instruments to ensure steady returns.
Features of Arbitrage Mutual Funds
Arbitrage funds are hybrid mutual funds that aim to profit from the price differential between the cash and futures markets of the same asset. They are designed to exploit market inefficiencies without taking on significant market risk. Here are some key features:
- Hybrid Nature: These funds combine elements of equity and debt investments, with a significant portion of the portfolio allocated to equities to qualify for equity fund taxation.
- Equity Taxation: For tax purposes, arbitrage funds are treated as equity funds, which can offer tax advantages over pure debt funds.
- Low Risk: Compared to pure equity funds, arbitrage funds are low risk mutual funds as they aim to generate returns through arbitrage opportunities rather than market movements.
- Market Volatility Advantage: These funds tend to perform well during volatile market conditions by capitalising on the price discrepancies between the cash and futures markets.
Advantages of Investing in Arbitrage Funds
The best arbitrage mutual funds list have several advantages:
- Minimal Risk: Arbitrage funds exploit low-risk arbitrage opportunities, offering short-term returns.
- Higher Returns than Savings Accounts: The top mutual funds in India in the arbitrage category typically outperform savings accounts, providing arbitrage funds returns even during market volatility. However, returns are subject to market risk are they are not guaranteed.
- Tax Advantages: Arbitrage funds are taxed as equity funds because they invest at least 65% in equities, potentially offering tax efficiency.
- Flexible Investment Options: Investors can choose to invest in a lump sum or via a systematic investment plan (SIP). Lump sum investments start at ₹ 1,000, while SIPs can begin with as little as ₹ 500, allowing gradual investment over time.
How are Returns Calculated for Arbitrage Funds?
The arbitrage fund returns are calculated based on the profits generated from exploiting price discrepancies between the cash and derivatives markets. Here’s a breakdown of how these returns are typically calculated:
- Arbitrage Opportunities: The fund manager identifies price differentials between the cash (spot) market and the futures market. For instance, if a stock is cheaper in the cash market than in the futures market, the fund will buy the stock in the cash market and simultaneously sell it in the futures market at a higher price. The trade is structured to be risk-free when the future expires, aiming for the prices in both markets to converge, locking in the difference as profit.
- Execution of Trades: The profit from each arbitrage trade depends on the successful execution of these buy and sell actions. The frequency and volume of successful trades contribute to the overall mutual fund performance.
- Interest Income: Apart from arbitrage trading in India profits, arbitrage funds may also earn interest from temporary cash holdings or short-term debt securities they might invest in while waiting for arbitrage opportunities.
- Calculation of Returns:
(a) Absolute Returns: For a given period, the return is simply the change in the fund’s net asset value (NAV), adjusted for any distributions such as dividends.
(b) Annualied Returns: This is the compounded annual growth rate (CAGR) that indicates the average yearly return if the fund’s performance were smoothed out over multiple years. It provides a standardised way of comparing performance with other investment options.
- Impact of Fees and Expenses: The returns are net of management fees, operational costs, and other associated charges. These expenses reduce the gross profits from arbitrage trades.
- Market Conditions: The availability and magnitude of arbitrage opportunities can vary with market volatility. Typically, more volatile markets present more opportunities for arbitrage, potentially leading to higher returns.
- Taxation: Returns are also influenced by how they are taxed. In India, for instance, arbitrage funds are treated as equity funds for tax purposes, affecting the net returns investors receive.
By carefully managing these aspects, arbitrage funds aim to provide investors with steady, low-risk returns, especially appealing in volatile or uncertain market environments.
Who Should Explore Arbitrage Funds?
Arbitrage funds are suitable for:
- Risk-averse Investors: Arbitrage mutual funds can be suitable for individuals seeking equity market exposure but are uncomfortable with mutual funds high risk.
- Short-term Investors: These funds are optimal for those planning to invest for a brief period, typically less than three years, due to their conservative nature.
- Tax-conscious Investors: By qualifying as equity funds for tax purposes, arbitrage mutual funds provide a more tax-efficient return compared to traditional fixed-income investments.
Note: However, investing in any stock is subject to market risk, and investors should do their own research before investing.
Risks Involved With Arbitrage Funds
While arbitrage funds are relatively low risk, they are not without their challenges:
- Interest and Credit Risks: While minimal, these risks exist because arbitrage funds invest part of their assets in short-term debt or term deposits.
- Flat Market Risks: During periods when markets are flat, arbitrage opportunities are scarce, potentially leading to lower-than-average returns.
- High Expense Ratios: The need for frequent trading in arbitrage funds can result in high expense ratios, which can impact overall returns.
Taxation on Arbitrage Funds after the Union Budget of 2024-25
Equity Mutual Funds
| Capital Gains Tax | Holding Period | Old Rate | New Rate |
| Short-Term Capital Gains (STCG) | Less than 12 months | 15% | 20% |
| Long-Term Capital Gains (LTCG) | More than 12 months | 10% | 12.50% |
- Tax-Free Limit: The capital gains up to Rs. 1.25 lakh per year are tax-free. This is an increase from the previous limit of Rs. 1 lakh.
- Tax Rate: The gains exceeding Rs. 1.25 lakh are now taxed at a flat rate of 12.5%. This is an increase from the previous rate of 10%.
- Indexation: The benefit of indexation, which allowed investors to adjust the purchase price for inflation, has been removed for all asset classes, including equity mutual funds.
Debt Mutual Funds
| Capital Gains Tax | Holding Period | Old Rate | New Rate |
| Short-Term Capital Gains (STCG) | Less than 36 months | Taxed according to your income tax slab | Taxed according to your income tax slab |
| Long-Term Capital Gains (LTCG) | More than 36 months | 10% | 12.50% |
- No Indexation Benefit: The previous benefit of adjusting the purchase price for inflation is removed. Now, the entire gain after three years is taxable at 12.5%.
- Change in Holding Period for Specified Mutual Funds: Previously, debt mutual funds with a holding period of over 36 months were taxed based on the investor’s tax slab, classified as Long-Term Capital Gains (LTCG). Now, for specified mutual funds where over 65% of the investment is in debt, the holding period for taxation has been reduced to over 24 months. These funds will still be taxed according to the investor’s tax slab as either LTCG or STCG.
Hybrid Mutual Funds
| Type of Hybrid Fund | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) | Indexation Benefit |
| Equity-Oriented Hybrid Funds | 20% for holdings less than 1 year | 12.5% for holdings over 1 year, with gains up to Rs. 1.25 lakh tax-free | Not available |
| Debt-Oriented Hybrid Funds | Taxed as per income tax slab for holdings less than 3 years | 12.5% for holdings over 3 years | Not available |
Note: Mutual fund schemes where neither the equity nor debt orientation exceeds 65% will now be classified as long-term investments after 24 months. The previous holding period for these funds was 36 months. These will be taxed at the revised LTCG tax rate of 12.5%.
Factors to Consider Before Investing in Arbitrage Funds in India
When considering the top 10 mutual funds in India, including the best arbitrage mutual funds, keep these factors in mind:
- Returns: Arbitrage mutual funds offer moderate returns as they mix equity and debt fund characteristics. They’re suitable for those familiar with market volatility.
- Investment Tenure: Given that these funds often have exit loads, they are best for investors who can commit for at least 3-6 months.
- Financial Goals: These funds are well-suited for short to medium-term goals. They can be used to park surplus funds, like building an emergency fund, while earning better returns than a traditional savings account.
To Wrap it Up…
Arbitrage funds are an investment option for those looking to balance risk with returns, particularly in unpredictable markets. They provide a distinctive strategy that enhances a diversified investment portfolio. With their mix of low-risk opportunities and potential for steady returns, arbitrage funds are appealing, especially in volatile conditions. Nonetheless, investors need to thoroughly evaluate their risk appetite, investment objectives, and the market environment before making an investment decision.
Frequently Asked Questions (FAQs) on Arbitrage Funds
Based on the 5-yr CAGR, here are the top arbitrage funds:
(a) Tata Arbitrage Fund
(b) Invesco India Arbitrage Fund
(c) Edelweiss Arbitrage Fund
Note: This information is intended for educational purposes and should not be construed as a recommendation or advice. The data on this list has been taken on 21st February 2025.
Investing in any funds, including arbitrage funds, is subject to market risk and investors should do their own research before investing.
The choice between arbitrage funds and other mutual funds depends on your risk tolerance, investment timeframe, and tax considerations. Arbitrage funds generally offer lower risk and greater tax efficiency.
Yes, you can invest in both SIP (Systematic Investment Plan) and Lump Sum modes for Arbitrage Fund. This flexibility allows investors to choose the investment method that aligns with their financial goals and risk tolerance.
Arbitrage funds are a type of hybrid mutual fund that seeks to generate returns by exploiting price differences between two markets, such as the cash (spot) market and the futures market.
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